Introduction:

To analyze internal resources and capabilities we have come up with the case of Starbucks ,a
coffee retailer, having an astounding financial performance in the industry. In the case the
company had resources and capabilities and thus originates some distinctive competencies
thus gave rise to superior profitability. Firstly we discussed SWOT analysis then went into
question answering.

Strengths
 Starbucks Corporation is a very profitable organization, earning in excess of $600
million in 2004.The company generated revenue of more than $5000 million in the
same year.
 It is a global coffee brand built upon a reputation for fine products and services. It has
almost 9000 cafes in almost 40 countries.
 Starbucks was one of the Fortune Top 100 Companies to Work For in 2005. The
company is a respected employer that values its workforce.
 The organization has strong ethical values and an ethical mission statement as
follows, 'Starbucks is committed to a role of environmental leadership in all facets of
our business.

Weaknesses
 Starbucks has a reputation for new product development and creativity. However,
they remain vulnerable to the possibility that their innovation may falter over time.
 The organization has a strong presence in the United States of America with more
than three quarters of their cafes located in the home market. It is often argued that
they need to look for a portfolio of countries, in order to spread business risk.
 The organization is dependent on a main competitive advantage, the retail of coffee.
This could make them slow to diversify into other sectors should the need arise.

Opportunities
 Starbucks are very good at taking advantage of opportunties. In 2004 the company
created a CD-burning service in their Santa Monica (California USA) cafe with
Hewlett Packard, where customers create their own music CD.
 New products and services that can be retailed in their cafes, such as Fair Trade
products.
 The company has the opportunity to expand its global operations. New markets for
coffee such as India and the Pacific Rim nations are beginning to emerge.
 Co-branding with other manufacturers of food and drink, and brand franchising to
manufacturers of other goods and services both have potential.

Threats

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  Who knows if the market for coffee will grow and stay in favour with customers, or
whether another type of beverage or leisure activity will replace coffee in the future?
 Starbucks are exposed to rises in the cost of coffee and dairy products.
 Since its conception in Pike Place Market, Seattle in 1971, Starbucks' success has lead
to the market entry of many competitors and copy cat brands that pose potential
threats.

Question No.-01

Identify the Resources, Capabilities and distinctive competencies of Starbucks.

The resources of Starbucks:

The resources are primary sources of competitive advantage, be it tangible or

intangible assets. In case of Starbucks we have figured out it had resources competitors could
hardly imitate. They have been detailed below.

THE TANGIBLE RESOURCES:

These are like physical assets which competitors may think to imitate easily. In case of
Starbucks we found the following tangible assets.

 Strong financial health that contributed to employee stock option and grants, medical
benefits
 Owned shops around the world
 Many shops inside and outside the USA
 Efficient management to take right decision timely
 Effective and efficient human resources

INTANGIBLE RESOURCES:
These components we found in Starbucks were really difficult to imitate by competitors as
these were more of internal know-how than that of physical assets.

 Prudent decision making power of management.

 Very unique styles of shops
 Quality knowledge of service orientation
 Perceived valued atmosphere
 Superior customer service

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  More experiences contributing to higher level of efficiencies of both management and
employees.

Capabilities:

Necessarily capabilities are more of importance as in some cases the capabilities alone can
transform the inputs into outputs efficiently. Here we found the followings.

 Capability to own shops

 Ability to add more services in the service lines along with coffee.
 Capability to provide higher level of incentives to workers leading to higher level of
efficiency
 The ability of entering foreign market ahead of competitors
 Better suiting the foreign cultural setting
 Capability to manage and operate shops outside the USA more efficiently with
motivated
 Ability to create a new format of coffee shop unique to market.
 Premium location choosing strategy

Distinctive competencies:

The firm-specific assets and capabilities of Starbucks we have figured out are the followings
which led the firm to have a superior performance and thus superior profitability.

 Very different capability to own shops rather than franchising what competitors
followed
 Choosing sophisticated location strategy providing higher leverage
 Very unique understanding of “Third Place” format coffeehouse.
 Highly motivated workforce
 Higher quality customized service to customer
 Better suiting the foreign cultural setting which was of course ahead of competitors.

Question No.-02

How do Starbuck’s resources, capabilities, and distinctive competencies translate

into superior financial performance?

Resources are the assets of the company. Starbuck’s resources are experience that is
intangible in nature which is gained from Italian coffeehouse experience. Another resource is
employee productivity as mentioned in the earlier section of the discussion that is achieved
by the training and hiring program which is also intangible in nature. However, the company

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has strong influential global brand recognition that is also intangible. Capability refers to the
skills at coordinating its resources and putting them to productive use. Superior customer
services are also intangible resources for Starbuck .Large number of retail stores are the
company’s core tangible assets.

Competitive advantages lead to the superior profitability that is transformed from the
company’s existing resources and capability. In order to achieve a competitive advantage, a
company needs to pursue strategies that build on its existing resources and capabilities. In
2006 its sales increase from $697 million to $6.8 billion and net profit, from $36 million to
$540 million. What factors lead to this massive profitability is the concern of the discussion.
Starbuck’s most prominent resource is its experience that is achieved from Italian
coffeehouse. The company devoted to the design of its stores and creates a relaxed, informal
and comfortable atmosphere which attracts valuable customers. The strategy is selling far
more than roasted coffee but selling experiences thus its trained employees provide good cup
of coffee as well as superior services to the customer as a result the average customers
repetition is twenty times a month. This increases the customer loyalty as a result superior
profitability is obvious.

Another factor drives its superior profitability is franchising arrangements as they

established a basic formula that works. So it expanded its restaurant chains rapidly to capture
as many premium location as possible, by extensive demographic analysis before its imitators
could, that also increases its competitive advantage thus superior profitability.

Another valuable resources that gives the company superior financial performance is
labor productivity. By providing progressive compensation policies that give even part time
employees stock option grant and medical benefits, that is innovative approach; the company
increases employee productivity as they are self-motivated and self-serving, that reduces time
of producing coffee, labor hours and increases customer services so the superior value is
crated which provides greater option for charging premium prices thus the cost leadership is
achieved which leads superior profitability.

Starbuck is one of the ten most influential global brands according to the magazine
Brandchannel. By 2005 it has almost 700 stores across The United States. So it started to
began exploring foreign opportunities by using its brand value and in October 2006, the
company announced 40000 stores worldwide and looking on that prospect it expects higher
financial performance as the procedure of making coffee is unique and it is franchised by the
company thus the services ensures identical to the parent company of Starbuck. So the
company’s sustained competitive advantages are thought to be pertinent.

In the above the resources, capabilities and distinctive competencies translate into superior
financial performance are discussed.

The role of strategy:

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Resources, capabilities, and strategy have strong relationship in achieving superior
profitability. Distinctive competences shape the strategies that the company pursues, which
lead to competitive advantage and superior profitability. In case of Starbucks the resources,
capabilities, and strategies also help to achieve profit. Another important issue is that the
strategies Starbucks adopts built new resources and capabilities at the same time these
enhancing the distinctive competences. The relationships between distinctive competences
and strategies’ are not linier rather it is a reciprocal which helped Starbucks to shape
strategies and to create distinctive competences.

Now how strategies helped Starbucks is given below-

In 2006 sales had increased from $697 million to $7.8 billion and net profits,
from $36 million to $540 million. At the same time Starbucks ROIC was 25.5% which was
impressive. All of these have been possible because Starbucks used its resources and
capabilities more aggressively. One strategy had been taken by Howard Schultz that was
coffeehouse format. The company had realized that third palace is essential to increase
performance for which it gave considerable attention to the design its stores to create a
relaxed, informal, and comfortable atmosphere. Provide Superior customer service was
another strategy. Starbucks also arranged training and hiring programs. Company preferred to
own its own stores. When the company grew, it started to develop a very sophisticated
location strategy.

By taking all of the above strategies and using resources, & capabilities Starbucks got
competitive advantage which leads it to earn superior profitability. This relationship can
expressed in graphically which is given below-

Resources

Distinctive Strategies Competitive Superior

competencies advantage profitability

Capabilities

Figure: resources, capabilities, and strategies relationship.

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Question No.-03

How secure is Starbuck’s competitive advantage? What are the barriers to imitation?

A
s being the large ubiquitous retailer of Starbucks does have the higher profitability
and profit growth compared to its competitor. Some of the sources of this superior
performance of Starbucks are

.  Superior customer services in stores

 Reasoning from motivated employees provide the best
customer service
 Starbucks executive developed employee hiring training
programs

Beyond this Starbucks provided progressive compensation policies that gave even
part time employees stock option plans and medical benefit. That will ultimately increase the
employee productivity and which is very much related to the efficiency and lower level of
cost structure..

However, the achievement of the competitive advantage is one part of the story. So
Starbucks has to protect its competitive advantage through some protective measures. It
ultimately determines the durability of the competitive advantage.

Barriers to imitation

Barriers to imitation indicate that how long the competitive advantage of the company will
last long. Higher the barriers to imitation more durable the competitive advantage will be.
That means more the imitation of the resources and capabilities take time for the rivals more
durable is the competitive advantage.

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Any competitors can get the competitive advantage of the firm ruined by imitating the
following two tactics.

 Imitating resources
 Imitating capabilities

It can be bifurcated into two major categories:

Imitating Resources:

TANGIBLE ASSETS:

It is regarded as the easiest way to imitate as the tangible resources that a firm has can be
imitated by the competitors as these can be bought or achieved at fair market value.
Sturbucks tangible assets include its large number of retail stores which expands surprisingly
around the world. Its comfortable atmosphere created in between the home and workplace.

The belief of the Starbucks has is that they are selling more than coffee. Those beliefs and
the pre described assets Starbucks has is relatively tough for the competitors to imitate.

INTANGIBLE ASSETS:

It is harder than the imitation of the tangible assets. It represents the brand name that the
customers value most and represents how effectively the form meets up the customer
demand.

Unlike many restaurant chains, which expanded very rapidly through franchising
arrangements once they established a basic formula that appears to work, the CEO of
Starbucks, Schultz believed that it needed to own its store. The formula set of and the
strategic intent of the Starbucks went from obscurity to one of the best known brands in the
United States. By 1995 with almost 700 stores across the United States, Starbucks obtain
foreign capabilities started with Japan, where Starbucks proved that the basic value
proposition could be applied in different cultural d\settings. Due to these extraordinary and
exclusive expansion of retail stores and value proposition by 2001, the magazine
Brandchannel named Starbucks one of the ten most influential global brands, a position it
has held ever since.

Imitating Capabilities

Imitation of the capabilities is tend to be the more tougher than imitating resources it is based
on the decisions and the organization structure, control system and culture.

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Starbucks exclusive capability of employee hiring and training programs which were
regarded to be the best in the restaurant industry.it is different from the other coffee retail
stores in the sense that Starbucks not only include its employee in the training class but also
teach them not only how to make good cup of coffee but also the service oriented values of
the company. Beyond these they have progressive compensation policies that gave even part
time employees

 Stock options grants.

 Medical benefits

These innovative strategies are different in an industry where most of the employees are part
-time, earn minimum wages, and have no benefits.

The ultimate results of these above mentioned tactics by Starbucks enhance the employee
productivity and thus reduce the cost. This gives Starbucks a major niche in the industry.

Capability of competitors

The capability of the competitors indicate the competitors ability of imitating the
major values, resources and use the knowledge.

The sophisticated segmentation of customers, positioning of the brand in the

customers mind, massive employee productivity, detailed demographic analysis, best
premium location strategy were something to be mentioned that are very tough to imitate for
the competitors in the industry.

Industry Dynamism:

A dynamic industry is that industry where innovation takes place continuously. The
competitive advantage that one firm has today can be wiped out or be made obsolete by the
new innovation of the competitors. The industry in which Starbucks operate is not dynamic.
It is the basic beverage industry in which the dynamism does hardly take place. In that sense
the competitive advantage Starbucks have achieved may be durable until other rivals can
copy them. As the company grew, it started to develop a very sophisticated location strategy.
They performed detailed demographic analysis to identify the best location. The company
tried to capture as much premium location as possible that their competitors can hardly
imitate.

Conclusion:
The corporation was unique in its way to transform the resources it had and utilize the
capabilities which finally supplemented to experience higher profitability at the end creating
value for the stakeholder and thus remain dominant in the industry.